The Mosler Plan for Greece

The Centre of the Universe

Posted by WARREN MOSLER on June 29th, 2011

The Mosler Plan, as previously posted on this website, is now making the rounds in Europe as an alternative to the French Plan that is currently under serious consideration:

Abstract
The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms.

The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government.

By eliminating the risk of loss, Greece will be able to independently fund all required financial obligations in the market place for the foreseeable future. The immediate benefits are both reduced interest costs that substantially contribute to deficit reduction, and the elimination of the need for the funding assistance from the European Union and the IMF.

Introduction- Restoring National Sovereignty
Current institutional arrangements have resulted in Greece being faced with escalating interest costs when it attempts to fund itself in the market place, to the point where timely funding is not currently available without external assistance. This requirement for external assistance to avoid default has further resulted in a loss of sovereignty, with the EU and IMF offering funding only on their approval of deficit reduction plans by the Greek government that meet specific requirements. Compliance with these demands from the EU and IMF not only include tax increases, spending cuts, and privatizations, but also include aggressive time lines for achieving their deficit reduction goals. It is also understood by all parties that the immediate near term consequences of these imposed austerity measures will include further slowing of the economy, and rising unemployment.

Greece will restore national sovereignty, and regain control of the process of full compliance with the general EU requirements for all member nations, only when it restores its financial independence. Financial independence will allow Greece to again be master of its own destiny, on an equal basis with the other EU members. And the lower interest rate that result(s) from this proposed bond issue will itself be a substantial down payment on the required deficit reduction, easing the requirements for tax increases, spending cuts, and privatizations.

While this proposal restores Greek national sovereignty, and eases funding burdens, we recognize that it is only the first step in restoring the Greek economy. Even with funding independence and low interest rates the Greek government still faces a monumental task in bringing Greece into full compliance with EU requirements and restoring economic output and employment. However, it should also be recognized that financial independence and low cost funding are the critical first steps to long term success.

The Bond Issue- No Risk of Financial Loss
Market based funding at the lowest possible interest rates requires investors who understand there is no ultimate risk of financial loss, and that the promise to pay principal and interest by the issuer is credible. To be credible, a borrower must have the means to meet all contractual euro obligations on a timely basis. For Greece this has meant investors must have the confidence that Greece can generate sufficient revenues through taxing and borrowing to repay its debts.

The credit worthiness of any loan begins with the default provisions. While there may be unconditional promises to pay, investors nonetheless value what their rights are in the event the borrower does not pay. Corporate debt often includes rights to specific collateral, priorities in specific revenues, and other credit enhancing support.

The new proposed Greek bond issue, with its provision that in the event of default the bonds can be used at face value, plus interest, for the payment of taxes by the bearer on demand, gives the bond holder absolute assurance that full maturity value in euro can always be achieved. And with this absolute assurance that these new securities are necessarily ‘money good’ the ability to refinance is established which dramatically reduces the risk of the default provisions actually being triggered. And, again, should there be a default event, the investor will still get full value for his investment as the entire euro value of the defaulted securities can be used at any time for the payment of Greek taxes. So while this discussion concerns the case of default, the removal of the risk of loss means there will always be demand for them at near risk free market interest rates, and that the default discussion is, for all practical purposes, hypothetical.

These new Greek government bonds will be of particular interest to banks, which, again, encourages bank ownership, which makes default that much more remote a possibility. This is because, in the case of default, a bank holding any of these defaulted securities will be able to use them for payment of taxes on behalf of bank clients (using that bank for payment of their taxes). Under these circumstances, a bank depositor client making payment of euro would, in effect, simultaneously buy the defaulted securities from the bank and use them to pay the Greek government taxes due. Again, the fact that the bank would be fully paid for its defaulted securities in the process of depositors paying their taxes means there will be no default in the first place, as these favorable consequences mean there will be continuous demand for new securities of this type at competitive market interest rates, to facilitate all Greek refinancing requirements.

The new ‘money good’ Greek bonds will be attractive to all global investors, both private and public. This will include international banks, insurance companies, pension funds, and other private investors, as well as sovereign wealth funds and foreign central banks which are accumulating euro reserves.

Fiscal Responsibility
As a member in good standing of the European Union, Greece, like all the member nations, is required to be in full compliance of all EU requirements. Therefore, while this proposal will restore national sovereignty, financial independence, and lower interest rates for Greece, austerity measures will continue to be required to bring Greece into EU compliance. However, Greece will gain substantial flexibility with regard to timing and other specific detail, and will be able to work to achieve its goals in an organized, orderly manner, without the continued pressures of default risk and without the specific terms and conditions currently being demanded by the EU and the IMF. Nor will the ECB be required to buy Greek bonds in the market place, obviating those demands as well.

Pensions industry eyes a gamble on Irish bonds
from kathleen barrington by Kathleen
10 October 2010
…..Currently, Irish pension schemes buy annuities based on German bonds which are seen as extremely safe, but are giving rock-bottom yields of about 3 per cent.
The industry wants the government to make available a supply of 12-to-15-year Irish government bonds issued by the National Treasury Management Agency.
The idea is that since Irish government bonds are offering 7 per cent, it will take a smaller pot of money to buy the income for retirees.
That in turn will leave more in the kitty for future pensioners and mean that hard-pressed employers will have to pony up less cash to plug the holes in their schemes.
The pensions industry calculates that buying annuities backed by German bonds is 20 per cent more expensive than ones backed by Irish bonds.
It also reckons investing in high-yielding Irish bonds would increase the value of pension funds from about 40 cents to 60 cents in the euro for a typical pension scheme.
In fact, the saving for pension funds would now be substantially greater, as Irish government bonds are now yielding far more than in February, when the industry made the original calculations on which its pleading is based.
The main problem with the proposal is that the interest rate on Irish government bonds is very high because there is a perceived risk that the Irish state might default on its obligations.
The pensions industry suggests that legislation would have to be amended to allow annuity payments to be cut if the underlying government bonds do not perform as anticipated.
In short, if the state were to default, then pensioners would lose out.
But supporters say that if the pension funds cannot invest in higher-yielding bonds, the alternative is that many more employers will have to cut the promised benefits to members or wind them up altogether leaving the country’s future pensioners much worse off in retirement.
In effect, the industry is caught between a rock and a hard place. Jerry Moriarty, chief executive of the Irish Association of Pension Funds, is the first to admit that ‘‘there is no real silver bullet.”
Supporters and opponents of the proposal agree it is a high risk strategy.
Where they differ is on the question of whether it was a risk worth taking, while some feel it might be a risk worth taking if certain conditions were attached.
Supporters said it was preferable to invest in risky Irish sovereign debt than to cut pensioner benefits. Some also argued that putting Irish pension money into Irish bonds was in the national interest as it would help the government to raise funds.
They played down the sovereign default risk, making the point that if that were to happen, all bets would be off anyway.
One Irish fund manager said he supported the proposal: ‘‘The general argument is, why buy German and French bonds when you could buy your own. I have sympathy with that.”
He considered that the current high probability of default attaching to Irish government bonds was ‘‘plain ridiculous’’.
In any event, he argued: ‘‘If Ireland goes into default, what happens to my pension fund is the least of my problems.”
An Irish bond expert said: ‘‘I am broadly in favour of the measures clearly they’re largely in sync with my thesis that pension liabilities should have a solid grounding in fixed income assets.”
A US bond expert said: ‘‘Not a bad idea. Intergenerational accounting should be done between the local savers (pension funds) and the local spenders (government today).
This will improve the chances that the debt gets paid back.”….

Berlin bailout could be the best worst-case scenario for Ireland

By Brendan Keenan @ the Independent, Thursday March 05 2009

In the euro area, the idea of ‘federal’ bonds issued by a central euro authority, from which countries would take their individual borrowing requirements, has also been ruled out.

All the plans are still hypothetical and all calls for hard cash — even from the commission — have fallen on deaf ears in the major capitals. So it is far from clear that any ‘rescue’ will actually take place.

But if it did, the political architecture in which Ireland would find itself would be transformed. Former Taoiseach Garret FitzGerald has already said the country risks losing its independence, which seems a fair description of any likely rescue package.

It might partly depend on what it was we were being rescued from. The general assumption is that it would be the fiscal crisis. Even that can take two forms, however. The Irish Government might be to blame, because it was unable or unwilling to impose enough tax rises and spending cuts to reduce the budget deficit, even to dangerous levels, from the present impossible ones.

In that case, any rescuer, be it Berlin or the IMF, would impose the same cutbacks, and a bit more, in return for providing the cash just to pay the public-sector wages and bills.

That is why it is so pointless to resist the necessary measures. They will come anyway. But all history shows that does not stop people resisting them.

Berlin, though, can be expected to impose more conditions than Washington in such circumstances.

Link to full article

1st published February 2nd

…..So here it is – to obtain the additional revenue our economy needs to make up for its lack of purchasing power, and upon which the economy is completely reliant, the government sells IOUs which increase in value with time. And when the time comes for them to be cashed, the government sells even more IOUs and uses this money to pay off the old ones. The government operates in an absurd system of debt-stocks which constitute a meaningless and utterly un-repayable debt to the future. This provides the government with a small amount of money now on the condition that they repay a much larger sum in ten or twenty year’s time. The government then proceeds to flood the market with these meaningless promises to pay, which can only be redeemed by the issue of yet more promises. The government draws on money already created as a debt, and relied upon for future payments on insurance claims and the pensions of the elderly, and allows banks and other lending institutions to purchase their bonds, conceding to these private institutions the right and power to create additional money, which is then loaned to the government at interest. Meanwhile, we must all work harder and harder, and the economy must become ever more productive and efficient to try to compete with other nations operating under the same lunatic structures, whilst the national debt inflates like a balloon…. Link to full article

Last Updated: 8:04PM GMT 23 Feb 2009

….Mr Trichet said the ECB has increased its balance sheet by €600bn (£525bn)
since the Lehman collapse in September. The bank is providing “unlimited
liquidity” in exchange for a wide range of collateral, including
mortgage bonds issued for the sole purpose of extracting ECB funds.

But the ECB’s leading voices have adamantly refused to contemplate going to
the next stage: buying bonds and other assets with “printed money”.
They see that as the Primrose path to hell. This week the tone has abruptly
changed, suggesting that a majority of the 16 national bank governors on the
ECB council are having second thoughts.

The apparent ring-leader is Cypriot member Anastasios Orphanides, a former Fed
official and a world authority on deflation traps. He said on Monday that
the ECB may have to go beyond “zero-bound” rates and revealed that
an “internal discussion” was under way.

Italy’s Mario Draghi is in the “activist-easing” camp. “The
experience in the US in the 1930s and Japan in the 1990s suggests that it is
necessary to fight, in the early phases of the crisis, the tendency for real
interest rates to rise,” he said.

Finland’s Erkki Liikanen is of the same opinion. “We are facing the worst
financial crisis in our time. It is important not to exclude, ex ante,
any measures.”

Julian Callow from Barclays Capital said 10 ECB governors are now doves.

This amounts to a mutiny against the Bundesbank-dominated executive in
Frankurt. It is no great surprise. They have to answer to their democracies.
The plot is thickening….Link to article